Merrill Slams Door on Mutual Funds in Commission IRAs

The head of Merrill Lynch’s mutual fund business told the firm’s 14,500 brokers on Tuesday that they must immediately stop selling mutual funds for brokerage-based retirement accounts.

To drive the point home, the Bank of America-owned brokerage giant said in a firm-wide memo to Merrill brokers that they will not be given any revenue credit on the firm’s compensation grid for such sales.

“As of November 1, any PCs [production credits] generated from mutual fund purchases in brokerage retirement accounts will not be credited towards the calculation of incentive compensation under the terms of the 2016 Merrill Lynch Financial Advisor Incentive Compensation Plan,” Frank McDonnell, head of global mutual funds, wrote in the memo.

“System blocks” preventing entry of fund orders in transactional retirement accounts are not yet in place but will be ready by next Monday, McDonnell wrote, indicating how quickly the decision was made.

“We are implementing this decision in advance of the DOL rule’s applicability date, to ensure as seamless and positive experience for our clients and advisors as possible,” a Merrill spokeswoman wrote in an e-mailed statement.

Merrill wants to eliminate the potential for compensation conflicts that could arise if a customer pays a commission for a purchase between now and April 10, and then has to pay additional fees to move into an advisory account or leave the firm.

The spokeswoman declined to discuss how much revenue the decision will cost Merrill, not only in sales to clients but in platform and distribution fees from fund companies.

Bank of America, which has paid more than $77 billion in fines in recent years to settle financial crisis charges, appears particularly sensitive to the potential legal consequences of violating the DOL rule’s fiduciary principle of putting customers’ interests ahead of brokers and their firms. It has taken a stricter approach to the rule than many rivals, recently telling advisors in its no-frills Merrill Edge discount brokerage unit that it will end all their commission-based account sales.

Edward Jones, which employs more than 14,000 brokers in mostly two-person offices, also has said that it will not allow sale of mutual funds and some exchange-traded funds in commission-based retirement accounts, though it has not totally banned commission accounts and is putting the policy in effect as of April 10.

“It is difficult to align the inconsistent pricing of mutual funds with the fiduciary standard in a transaction-based IRA,” a spokeswoman at the St. Louis-based company said.

Merrill as of Tuesday stopped accepting letters of intent for fund sales, will not allow fund exchanges as of April 10 and told brokers to cancel automatic investment program instructions in brokerage retirement accounts as soon as possible as they will not be executed once system blocks are in place, according to McDonnell’s memo.

In one piece of good news for advisors, the memo said that compensation trails for fund positions in legacy asset exemption accounts will continue to be paid on and after April 10.

“The decisions we’ve made….reflect our goal of ensuring that our advisors and our firm are best positioned to comply with the [fiduciary] rule,” McDonnell wrote.

People are going to run away from Merrill and Merrill Edge in droves. Especially Merrill Edge – they just dumped everyone with less than $250,000 over there. Where they’re going? I’m not sure, I guess Vanguard or TD Ameritrade and do it themselves.

Consumers are starting to get wind of this and they are not happy. Older women who’ve inherited their husband’s IRAs are pissed off now they’re being told they need to pay an annual fee………….and for what, for someone to send them their RMD each year. This goes against the very premise of “buy and hold.” The DOL – Department of Lunatics.

As a financial advisor, I have built a business over the past 28 years helping clients accumulate wealth. I have accumulated $120 million of assets, mostly in A share mutual funds. My clients have benefited greatly from low ongoing fees (on average total cost of .65% per year) over the past, combined with great service and yearly face to face meetings. And now some team of government officials decides that my clients are better off paying me an “advisory fee” and not some lousy “commission”. Results? My new clients will experience annual costs that are at least double of what my old clients have paid. So, tell me again why this is good for consumers? If you object to high commission, crappy product, then outlaw that product. But to suddenly put the whole industry on its head makes no sense to me. Sounds a lot like an “obamacare” solution. And the media wonders why Trump is popular……Regulations are out of control! I am a CFP, and have always acted as a fiduciary in practice. Its going to be a very painful 6 months, but I will survive. Small advisors will not. Its a shame that the government continues to think they are helping people when the end result will most certainly prove otherwise.

I am in the same boat 110M AUM (28 years in the business) mostly A shares, now we have to charge more than double or use the BICE and be subject to class action lawsuits, sounds like another rule by lawyers for lawyers. Luckily I’m also a CPA and kept my CPA practice active. Please someone tell me why A shares were not exempted from this whole process since they are the lowest cost option for any long term investor who needs an advisor and most mutual funds have the same payout grids. (Therefore no conflict of interest).

You’re missing the point. Clients now have less choice (at some places) in how they want to pay. Every year for 30 years or once in their life. Nations Bank/Merrill just showed a bunch of clients the door. If you’re truly an FA and compete on price alone, and indexing, what value are you providing.

But now, a client can invest in diversified portfolios with NO up front sales charge, and pay fees ranging from 15bp-75bp annually. Meanwhile most A Share funds are in the 50-80bp expense ratio even AFTER paying 5% up front. So the investor starts out with less to invest, and has less flexibility and less liquidity.

I wonder how many of the FA’s railing against the new reality (yes, that’s what it is, reality, get over it) were as vigorous in their defense of the client when May Day came around in 1974, when fund commissions dropped to a measly 5.75% from 8% plus, or defending their actively managed funds charging multiples of index funds for often lesser performance. The discussion should be focused on what you are getting paid for and how transparent is that to your clients.

Kudos to Mother Merrill! Could be a recruiting ploy but on the surface…good for them. Amazed by those who say ‘i can’t make a living acting in my clients best interest’ Or’ I have to disclose my fees…if this I am going to….find someplace where I can’ You’re (meaning these retail brokers termed ‘advisors’ or ‘wealth managers’) whole business has been based on ripping people off and taking advantage of those with less information…more brains but less information. All of you should go away

Observer, your comments completely assume that every advisor placing client assets in mutual fund investments is “taking advantage of those with less information.” I would assert to you that you are dead wrong. Your first assumption is that mutual funds inherently are a bad investments and that any advisor that advises clients to invest in mutual funds is a bad advisor. If that is the case, then please tell me, what do you tell those “retail brokers” that have clients in one mutual fund family and have made adjustments within that same fund family over the course of decades? What if these same “retail brokers” have made sure that the client’s assets are properly allocated to smooth the ride and meet or exceed not only the proper benchmarks, but the client’s objectives and expectations? THERE ARE GOOD ADVISORS AND THERE ARE BAD ADVISORS IN THE FINANCIAL INDUSTRY. THERE ARE GOOD MUTUAL FUNDS AND THAT ARE SUB-PAR MUTUAL FUNDS AS WELL. It seems to me that you might ought to consider applying for work at the Department of Labor because you seem to have picked up their mantle. The problem with the DOL rules is that they too assume that everybody in the financial industry is bad and out to screw the public. Just as that is not true, neither is your assumption that all financial advisors and mutual funds are bad either. Personally, I believe that Merrill Lynch has run a quality firm for a long, long time and the takeover of Merrill Lynch by Bank of America was the worst thing ever to have happened to that firm. Merrill has demanded much of their advisors and in return their advisors have maintained a high level of respectability (full disclosure: I DO NOT WORK FOR MERRILL LYNCH, just in case you had already jumped to that conclusion.) So with this move, Mr. Observer, you may get your wish: a significant decrease in “these retail brokers termed ‘advisors’ or ‘wealth managers.’ Maybe your other wish will also come true: a Home Depot type of investment climate, at which point even the Department of Labor will not be able to save people from themselves.

It’s all about the perverse incentives. Perverse incentives drive perverse behavior. Perverse incentives equal a diseased orchard…not just bad apples…a diseased orchard!!! Merrill Lynch is and always has been a diseased orchard as have all of the other Too-Big-To-Fail banks.

Banks hate brokers AND advisors. This law allows them to run roughshod over good people so that they can extend their “models” to clients for a fee and pay a little to no experience bank advisor a salary, of 30-40,000 a year to distribute fatally flawed models that keep you in during stock market crashes where you lose half your money or more. They are managing a declining business, and trying to keep as much money for the firms executives as the inevitable decline persists. Clients are (and have been) leaving and doing it themselves, over 50% of individuals, and so are advisors going independent. The DOL rule helps banks control more of what they could not. Wake up everyone. They wanted this.

A well managed portfolio, IRA or Retail account, will have multiple asset categories owned. This allows for diversification and liquidity, while also owning stocks and bonds. (buy and hold) This creates a hybrid of sort, with a blended average expense ratio, much lower than anything the DOL is considering. I spend a lot time reviewing performance on those mutual funds with minimal compensation for my effort.